Merry-Go-Round Enterprises, Inc. History

Public CompanyIncorporated:1970 Employees: 9,895 Sales: $761.1 million Stock Exchanges: New York SICs: 5651 Family Clothing Stores

Company History:

Founded in Baltimore, Maryland, in 1968 as a trendy boutique selling only blue jeans, Merry-Go-Round Enterprises, Inc. (MGRE) has grown to become one of the leading retailers of contemporary fashion for men and women age 15 to 35. MGRE operates nearly 1,000 retail stores in 39 states, almost all of which are found in enclosed shopping malls. The original Merry-Go-Round chain and its sister stores, Dejaiz, Attivo, and Cignal, offer a wide range of high-fashion clothing from prom gowns to denim trousers. Due to astute financial practices and a keen ability to capitalize on up-and-coming fashion trends, MGRE has shown a consistent rise in revenues virtually since its incorporation as a public company in 1983.

The first Merry-Go-Round boutique was founded by boyhood chums Leonard Weinglass and Harold Goldsmith. Although Weinglass remains chairman of the board (Goldsmith passed away in 1991), he ceased to be involved in the company's daily business operations during the 1970s. Many operations were taken over by Michael Sullivan, who was hired as chief financial officer in 1974. Under Sullivan's direction, MGRE began to officially implement its long-standing policy of capitalizing on short-lived but profitable clothing fads, opening stores in the enclosed shopping malls that sprang up throughout the United States in the 1970s and 1980s.

In the early 1970s, store interiors were all black, and clothing was held in bins or by metal chains. As trends and styles changed, Merry-Go-Round also changed, and by the 1990s store interiors were brightened with neon and chrome, reflecting the tastes of the younger generation. Despite these cosmetic changes, the underlying market strategy of capitalizing on fashion fads remained constant. Over the years, Merry-Go-Round and its sister stores have created their own market niche by positioning themselves as purveyors of trendy clothing. MGRE has remained financially secure through a combination of conservative business practices, intelligent acquisitions, and a keen ability to spot fashion trends.

Merry-Go-Round's first fashion coup was to sell prewashed patchwork denim jeans in 1974, which immediately became a hit among fashion-conscious youth and helped boost the company out of a recession. The company was also the first to place an order with Bugle Boy, a manufacturer of casual sportswear destined to become popular among teenagers. In 1977 Merry-Go-Round began capitalizing on the disco craze ignited by the movie Saturday Night Fever by selling silk shirts and three-piece polyester suits. When the movie Urban Cowboy was released, Merry-Go-Round stores began carrying Western wear and suede jackets with fringe on the sleeves. MGRE's buyers began closely studying the cable television channel MTV (Music Television) shortly after its debut in the late 1970s. From that point on, MTV became the source of many designs introduced in Merry-Go-Round stores. When pop star Michael Jackson appeared on MTV wearing a red leather jacket with 27 zippers, Merry-Go-Round sold more than 50,000 similar jackets at $29 each. Similarly, when the lead singer in the rock band Def Leppard performed in a video sporting a Union Jack sweatshirt with cut-off sleeves, a new fad was born. Merry-Go-Round sold over 40,000 copies of the sweatshirt at $15 each.

Cashing in on fashion trends is considered a risky business, but in 1979, MGRE realized that it was best not to tamper with its seemingly precarious formula for success. Fearing that the economic recession would hurt the high-end fashion business, Merry-Go-Round stores began selling less expensive, less fashionable clothing. Net income fell almost three quarters to $570,000, down from over $2 million in 1978. "We found out that customers weren't all that price-conscious," Sullivan told Forbes magazine in 1984. "They were more interested in fashion." Accordingly, Merry-Go-Round discontinued its lower priced merchandise and returned to selling more clothing that followed trends set by rock and roll and other media stars.

In 1982 MGRE opened two new clothing chains. Ship 'N Shore Showcase Shops, a woman's clothing chain, offered medium-priced sportswear--designed for a more conservative clientele of working women--manufactured by General Mills' Ship 'N Shore division. Another chain, DJ's Fashion Center for Men, offered a wider selection of male fashions than traditional Merry-Go-round stores and was aimed at attracting a clientele of fashion-conscious men, a group that had been previously underserved in most shopping malls.

Sullivan was promoted from chief financial officer to chief executive officer in the early 1980s. Under his direction, the rapidly expanding MGRE was subdivided into three divisions. The largest division was comprised of the Merry-Go-Round chain, numbering close to 200 stores. The second-largest, called the Menz division, housed the fast-growing DJ's chain, while the third-largest housed Ship 'N Shore Showcase Shops.

In July of 1983, with annual sales of $75.5 million and a net income of $3.5 million, or 88 cents a share, MGRE went public. By 1984 net income had jumped 108 percent to $7.3 million, or $1.79 a share. MGRE owned 247 stores in 29 states: 204 Merry-Go-Round stores, 33 DJ's Fashion Centers for Men, and 10 Ship 'N Shore Showcase Shops.

MGRE continued its expansion in the mid-1980s, opening between 20 and 25 new stores annually. Much of MGRE's growth was through purchasing and renovating unsuccessful clothing chains. "If we can find an attractively priced clothing chain of 15 to 20 stores with suitable locations, we would probably acquire that chain and convert it to our type of operations," Sullivan told Barron's in 1984. MGRE soon added to its Menz division Attivo, a clothing chain selling young men's fashion. Despite growing sales in its Menz division, MGRE's earnings dropped in 1986 and 1987. This was primarily due to a sluggish woman's clothing market, which affected sales in the Ship 'N Shore division. In response to the poor performance of Ship 'N Shore's conservative apparel, MGRE replaced the chain with Cignal, a new retail operation selling high-priced European-style men's and women's sportswear.

In 1987 MGRE was ranked 34th on Forbes list of the 200 best small companies in America, with a five-year average return on equity of 29.1 percent. The company continued expanding its profitable Menz division, buying the 28-unit sportswear chain Casey & Osh in 1988 to convert into a new chain of Attivo stores. Also that year, the Merry-Go-Round division made its first foray into the Manhattan market, opening a 3,500-square-foot store in the East Village. Including the Casey & Osh acquisition, the number of MGRE stores grew to 459 by March of 1988.

One of MGRE's most innovative concepts, Boogies Diner, a combination restaurant and clothing store was introduced in a Chicago test market in 1989 and went national with the opening of a Washington, D.C., store in 1990. Boogies Diner was the brainchild of MGRE founder and chief executive officer Leonard Weinglass, whose colorful personality, it has been conjectured, was the basis for the character Boogie in the 1982 movie Diner. Weinglass had privately opened a Boogies in Aspen, Colorado, and given the idea to MGRE free of charge. "We want to be on the cutting edge of things for young people, and we think this is it," Sullivan told the Washington Post. "This is retail overlaid by a theater aspect. The diner brings in people who would not normally be attracted by the retail and the retail attracts the diners." Contingent upon the success of the Washington store, the company planned to open other Boogies Diners in New York, Los Angeles, and Las Vegas.

A New York Times profile in 1990 attributed MGRE's success, in part, to strong inventory tracking and management as well as to the continuity of the company's top management. Paul D. Levine, Stuart M. Lucas, and Ken Rodriguez, heads of MGRE's Merry-Go-Round, Menz, and Cignal divisions, respectively, began as store clerks in the 1970s. "There's a lack of buying talent in the young men's business, and they seem to have it," a retail analyst said of the three men.

Under Lucas, MGRE launched I.O.U., its first private label. The I.O.U. brand offers reasonably priced casual clothing aimed at a teenage market. By 1990 the label accounted for 25 to 30 percent of MGRE's annual sales. I.O.U. tee-shirts, shorts, and sweatshirts were so popular that a number of counterfeit goods were manufactured and sold. In 1992 MGRE filed suit against United Outlet Centers, New York-based discount stores, alleging that the chain manufactured and sold a number of counterfeit I.O.U. goods. The two companies settled out of court for an undisclosed amount of money and a promise from United Outlets not to violate the trademark again.

In 1991 MGRE was caught in a minor race relations scandal when a customer noticed that sales clerks at all MGRE stores were noting customers' race on the backs of all personal checks. A front-page story about the company's tactic appeared in the Boston Globe, on April 3, 1991. The following day, MGRE announced that it was discontinuing the practice. Company officials issued an apology but defended their position by stating that the noting of race on the backs of checks was "solely for identification purposes, in the event the check did not clear."

Profits continued climbing as the number of stores owned by MGRE grew to 600 by March of 1990. Share prices soared from approximately $6 to almost $27 dollars in just 18 months. However, a decision by Weinglass and a "key partner" to sell $32 million of their MGRE stock in 1989 and another $43.8 million in 1990 caused strong speculation among the investment community that MGRE's heady growth was cooling. Market analysts predicted that once MGRE's recent outlet acquisitions reached the sales levels of older stores, double-digit growth would be difficult to sustain.

MGRE's impressive profit growth continued unabated through the fiscal year ending February 1, 1992. Profits for that year fell 39 percent, caused in part by a slow-down in the women's clothing market and deep discounting during the Christmas season. In response, MGRE initiated a number of measures to improve financial results. Among them were a 45 percent cut in salaries for top officers, a 7 percent reduction in inventory, and careful control of business expenses. At the company's annual meeting, Sullivan outlined a ten-year plan to boost business through expansion, increasing the number of MGRE stores from 900 to 1,800.

True to plan, MGRE purchased the Worth retail chain of 88 NET Work women's clothing stores in June of 1992 for an undisclosed price. MGRE retained the NET Work name but added a line of men's clothing to the pre-existing line of moderately-priced women's wear. Within two weeks of the Worth purchase, MGRE entered into negotiations to purchase three units of the Baltimore-based Hamburgers clothing chain. The company also opened two Boogies Diners and a prototype Merry-Go-Round Fashion Cafe, that year, with the Las Vegas location breaking company records for sales volume.

In August of 1992 MGRE stock posted an upturn after a positive recommendation from Kidder Peabody & Co. Financial results for that year were mixed, however; Net sales increased by only 15 percent, even though the number of stores increased by 20 percent. MGRE continued its expansion in 1993, purchasing the 476-store chain of Chess King/Garage men's clothing stores from Melville Corp. for an undisclosed amount. Market experts seemed confident of MGRE's chances for success through the rest of 1990s. As one analyst put it, Merry-Go-Round Enterprises, Inc., "is as good as anybody at identifying what's hot, getting it to the store, and selling it."